INSIGHT: Clear concerns on threats to growth after Q3 slowdown

03 October 2011 16:50[Source: ICIS news]

By Nigel Davis

BERLIN (ICIS)--It is really a question of what a soft third quarter gives way to in the run-up to the end of the year.

In olefins, the “drum tight” first quarter of 2011 produced overheated margins, particularly when viewed from where the industry sits this year in the capacity and supply/demand cycle. In aromatics the picture was very much the same.

Upstream in both segments, the second half is proving to be slow following a quiet August, particularly in Europe. Demand weakened in September and is weaker again in October.

Producers and consumers of upstream chemicals do not want to see much change in the final months of the year or to spook downstream markets. The threats to demand growth are clear: Europe’s sovereign debt crisis, slow GDP growth in the US, and China’s battle with inflation.

For this industry, it is the China question that looms large. Given the focus on managing inflation, there can be little likelihood of further fiscal stimulus in China should things go horribly wrong in Europe. If the eurozone debt crisis is not contained the contagion will spread, threatening growth in emerging economies.

?xml:namespace>ICIS reported on Monday that the US chemicals demand slowdown expected in the fourth quarter should only be a correction following an “overheated” first half. It does not mean that the country is slipping back into recession.

Industry executives at this year’s European Petrochemical Association (EPCA) meeting in Berlin, the 45th, have spoken of more normal supply/demand balances in mid-year.

The slowdown in demand and fall in petrochemical margins over the past couple of months are a “fairly natural adjustment” to mid-cycle conditions, Tom Crotty, INEOS board director and EPCA president said on Sunday.

“Things are pretty good really," he added on the sidelines of the meeting. Basic demand is pretty steady, driven by major western economies that have recovered following the 2008–2009 crisis and are “just ticking over”.